Types of Government

Basic Economic Unit Part II

Types of Economic Systems

Traditional

Little Change Based on Custom

How they always have been answered

Command

Socialism

Socialism: Government controls major industries and distributes many needs and wants

Communism

Socialism with a dictatorship. Government controls everything

How do command economies answer the basic economic questions?

The Government does

Market

Characteristics

Private Individuals control factors of production

Individual freedom

Basic Economic Questions

Interaction between producers and consumers

All economies are actually mixed. What determines whether an economy is considered market or command depends on the level of

Government involvement.

Centrally Planned vs. Free Market

North Korea, United States, Cuba, Germany, China

More Gov. Less Gov.

Socialist or Market?

“Proposed increase in minimum wage” “Oil prices soar because of Middle East

unrest” “Stock prices plummet due to concerns

over European markets” “FDA recalls Butterball Turkeys Over

Salmonella concerns” “Recent freeze could lead to increase in

cost of strawberries”

Market

The exchange of goods and services between buyers and sellers

What does the Circular Flow Model illustrate?

Factor Market

Where productive resources are bought and sold

Product Market

Market where goods and services (finished products) are offered for sale

Trade and Its Benefit

Trade The voluntary exchange of

goods and services Benefit Creates Value

What happens when less is exchanged in the circular flow?

The economy shrinks

What happens when more is exchanged?

Economy grows

INFLATION

What can we use to measure the size of the economy?

GDPThe Dollar value of all FINAL goods and services produced

in a nation in a year.

Real GDP

GDP - Inflation

What is productivity?

The amount of output that can be produced by a set amount of resources in a given period of time

Increasing Productivity

Specialization = when people, businesses or countries focus on what they do best

Division of Labor = breaking down of a job into small parts performed by different workers

Investing in Human Capital = spending to improve worker skills

Specialization and Trade

Fish Pineapple

Jake 20 30

George 15 50

What do these practices create between individuals, communities and nations?

Economic Interdependence

dependence between people for goods and services

Origins and Characteristics of Economic Theory

Adam Smith

What was the Wealth of Nations?

Smith’s book that explained the principles of Capitalism

What did Smith mean by Laissez-faire economics?

“To let alone” Government’s

only economic role is to ensure competition

The Invisible Hand

Belief that individuals left on their own would work for own self-interest

Would be guided by “invisible hand” to use resources efficiently (Government needs to do little)

Invisible Hand

Self-Interest + Competition=

Higher Quality + Lower Prices=

Most Efficient Use of Resources

Karl Marx

Father of Communism

Das Kapital

Exploitation of the working class

Failure of Capitalism

The ‘haves’ and the ‘have nots’

Class Conflict

Capitalists (Owners of the means of

production)

And

Workers

Capitalism’s Fall

John Maynard Keynes

Established a new role of government in a Capitalist economy.

Way out of Depression

Government to start spending

Franklin D. Roosevelt

Public Works Program

Characteristics of Capitalism

Free Enterprise – Competition with little government interference

Freedom of Choice – individuals can choose what work to do and what to buy (creates Consumer Sovereignty in the market)

Private Property – right to own and use our property how we choose within certain legal limits. Provides incentives to take care of and invest.

Profit Incentive – (Self-Interest) the driving force of capitalism, the ability to accumulate wealth

Competition – (the regulator) the struggle between buyers and sellers to get the best products at the best prices